Which pairing is CORRECT? Moral hazard: used car consumers don’t know which of t

Question

Which pairing is CORRECT?

Moral hazard: used car consumers don’t know which of the used cars on the market is in good condition (peaches) and which is in bad condition (lemons).

Moral hazard: used car consumers offer a low expected price and for this reason, sellers of good cars (peaches) don’t sell them or offer them to sell in the market.

Adverse selection: used car consumers don’t know which of the used cars on the market is in good condition (peaches) and which is in bad condition (lemons).

Adverse selection: used car consumers offer a low expected price and for this reason, sellers of good cars (peaches) don’t sell them or offer them to sell in the market.

Moral hazard: used car consumers don’t know which of the used cars on the market is in good condition (peaches) and which is in bad condition (lemons).

Moral hazard: used car consumers offer a low expected price and for this reason, sellers of good cars (peaches) don’t sell them or offer them to sell in the market.

Adverse selection: used car consumers don’t know which of the used cars on the market is in good condition (peaches) and which is in bad condition (lemons).

Adverse selection: used car consumers offer a low expected price and for this reason, sellers of good cars (peaches) don’t sell them or offer them to sell in the market.

Explanation / Answer

Adverse selection occurs where asymmetry of information exists. Here, information is not evenly distributed between buyers and sellers. Either buyers or sellers are underfed with respect to information.

consumer does not have knowledge about the condition of car in market. Thus, consumer is unable to differentiate between good quality and low quality cars.

Hence, right answer is (D)

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